Lufax positioned itself as a leading technology-empowered personal financial services platform.
Their mission is to make retail borrowing and wealth management easier, safer and more efficient.
China has the second largest financial system globally, both by retail credit lending volume in 2019 and by the total amount of investable assets as of December 31, 2019. The estimated demand for small business financing in China was RMB89.7 trillion (US$12.7 trillion) in 2019, of which RMB46.6 trillion (US$6.6 trillion) was unmet. In addition, the current outstanding balance of consumer loans in China is estimated to be RMB12.7 trillion (US$1.8 trillion) as of December 31, 2019. As of the same date, China’s personal investable assets reached RMB192 trillion (US$27 trillion), making it the second largest personal wealth management market globally, and only RMB49 trillion (US$7 trillion) or 26% has been placed in wealth management products.
1.Retail Credit Facilitation
Lu primarily address the large unmet demand for personal lending among small business owners as well as salaried workers in China, and provide tailor-made wealth management solutions to China’s fast growing middle class and affluent population. As of June 30, 2020, Lu's total balance of retail credit facilitated reached RMB519.4 billion (US$73.5 billion), and the total client assets generated through their online wealth management platform reached RMB374.7 billion (US$53.0 billion), ranking number two and number three, respectively, among non-traditional financial service providers in China such as fintech companies, online-only TechFin companies and online lending platforms, according to Oliver Wyman.
Lu is well positioned to capture markets which have been underserved by traditional financial institutions and online-only TechFin platforms backed by major internet companies, such as Ant Financial, WeBank and Tencent Licaitong. Many traditional financial institutions do not have the necessary skills, data and technology to fully address these customer needs, while online-only TechFin platforms, which provide financial services but are operated by tech companies rather than financial institutions, generally lack the financial data and financial services capability to price credit risk appropriately for borrowers and provide suitable products to investors. Lu's business is built on:
•Unique capital-light, hub-and-spoke business model: Lu operates a scalable capital-light business model focusing on large, underserved, yet highly attractive segments. Their platform has two “hubs”, connecting hundreds of financial institution “spokes,” to facilitate lending and wealth management products tailored to individual customers’ needs and risk appetites. Their hubs are tied to an integrated account which accumulates users’ data to drive ongoing personalization of services.
•Proven technology applications: Lu's distinctiveness is founded on their ability to develop purpose-built technology, combine it with their financial expertise, and embed these solutions throughout business. With proprietary data accumulated over 15 years, they have created cutting-edge capabilities in know your product (KYP), know your business (KYB), and know your customer (KYC) to effectively assess risk and facilitate products to customers. These three areas leverage extensive data, AI applications, machine learning, and blockchain solutions to price credit and manage suitability-related risks effectively, and to deliver sophisticated digital customer services efficiently.
•Deep financial services expertise: Lu's relationship with Ping An Group, a top 2 Fortune Global 500 financial institution by 2019 revenue, provides Lu with valuable access to its ecosystem. Through commercial relationships across the Ping An ecosystem, Lu benefit from potential access to Ping An Group’s approximately 210 million financial services customers, a proportion of which are small business owners and middle class and affluent investors. Lu also have collaboration with Ping An businesses, distribution channels, and product capabilities spanning insurance, investment, banking, and analytics.
•Strong offline-to-online channel integration: Lu's deep integration across channels allows them to better meet the borrowing and wealth management needs of small business owners and middle class and affluent investors through a superior online customer experience complemented with the option of offline assistance. Combining large direct salesforce of over 56,000 members and online telemarketing team of over 4,000 personnel, with Lu's collaboration across the Ping An ecosystem, empowers them to provide more sophisticated services to small business owners and middle class and affluent investors more effectively than online-only TechFin platforms.
•Through-the-cycle track record: Their strong performance through credit cycles demonstrates the benefit of our superior financial data and our ability to price and manage risk effectively relative to Lu's online-only peers, as well as their ability to respond quickly and adjust their business effectively to regulatory changes. Moreover, they have delivered stable operating results through cycles. Over the three years from 2017 through 2019, their total balance of loans facilitated grew at a CAGR of 26.6%, while Lu's total wealth management client assets, excluding legacy products, grew at a CAGR of 39.4%.
Over the three years from 2017 through 2019, Lu total balance of loans facilitated grew at a CAGR of 26.6%, while total wealth management client assets, excluding legacy products, grew at a CAGR of 39.4%. Total income increased from RMB27.8 billion to RMB47.8 billion (US$6.8 billion), representing a CAGR of 31.1%, and net profit increased from RMB6.0 billion to RMB13.3 billion (US$1.9 billion), representing a CAGR of 48.6%, during the same period. Lu had a total income of RMB25.7 billion (US$3.6 billion) and net profit of RMB7.3 billion (US$1.0 billion) for the first six months of 2020. As Lu have become increasingly capital-light, their income contribution from technology platform services grew from 61.9% in 2017 to 87.7% in 2019, while the net margin increased from 21.7% to 27.8% during the same period. For the first six months of 2020, their income contribution from technology platform services was 83.5% and our net margin was 28.3%.
•Leading platform in a sizable and attractive market. Lu ranked number 2 in retail credit facilitation and number 3 in wealth management, in each case among non-traditional financial service providers in China as of June 30, 2020, according to Oliver Wyman.
•Customer-centric product offerings and offline-to-online channels. Lu's end-to-end technology platform integrates with offline-to-online capabilities, combining elegance, scalability and flexibility with deep customer relationships and effective risk management.
•Technology-enabled customer experience and services. Lu integrate cutting-edge technologies with their product and service offerings to enable a seamless and personalized experience throughout the customer journey.
•Cutting-edge data-driven risk management. Lu embed advanced AI, big data, blockchain technology and analytics into business processes resulting in a highly sophisticated, holistic and adaptable risk management system.
•Scalable capital-light business model. Lu have implemented a capital-light business model that has allowed them to grow rapidly with minimal constraints from capital demands and scale rapidly with lower costs.
•Innovation and synergies within the Ping An ecosystem. Lu have benefited immensely from the relationship with Ping An Group while maintaining a high degree of self-sufficiency.
The retail credit market in China primarily consists of small business loans and individual consumer loans. In 2019, the outstanding balance of small business loans in China reached RMB43.1 trillion (US$6.1 trillion), representing a five-year CAGR of 14.3% between 2014 and 2019, and is expected to grow to RMB76.6 trillion in 2024, at a five-year CAGR of 12.2%, according to the Oliver Wyman Report. Small businesses serve as the backbone of the Chinese economy with significant contributions to China’s GDP, employment, tax revenues and innovation. The total demand for small business loans in 2019 was estimated to be RMB89.7 trillion (US$12.7 trillion), indicating that approximately 52% of demand (or RMB46.6 trillion) remained unserved. Such unserved demand is forecast to reach RMB50.0 trillion by 2024.
The funding gap is primarily due to the enormous difficulties faced by small businesses, which typically do not have an established operating history or substantial assets to be used as collateral in obtaining sufficient credit at a reasonable cost. In addition, traditional financial institutions and large online-only TechFin companies are often less well equipped to meet small businesses’ specific needs for a streamlined online application process, face-to-face collateral evaluation consultations, large ticket size and longer-tenured operating loans, choices of both secured and unsecured loans and prompt response to urgent funding requests. In comparison, technology-enabled large fintech players with strong technology and data capabilities and effective offline-to-online models are presented with great opportunities in addressing this unserved market.
China’s wealth management market has been growing rapidly, driven by the fast growth of the middle class and affluent population and their increasing demand for personalized investment. Total assets under management of the wealth management market reached RMB49.4 trillion (US$7.0 trillion) in 2019 and are expected to grow to RMB118.0 trillion by the end of 2024, representing a five-year CAGR of 19%. In particular, wealth management players who can leverage advanced technology, offer efficient processing time and maintain low distribution costs are experiencing significant growth. The online non-traditional financial service provider wealth management market had assets under management of RMB7.6 trillion (US$1.1 trillion) in 2019, which is expected to grow at a five-year CAGR of 29% to reach RMB27.5 trillion by the end of 2024, and the online penetration rate of wealth management services in China by total assets under management was 29% in 2019, compared with 43% in the U.S., and is expected to reach 42% in 2024.
1.A credit crisis or a prolonged downturn in the credit markets may materially and adversely impact their reputation, business, results of operations and financial position.
2.The total fees Lu charge for retail credit facilitation service may be deemed to be in excess of interest rate limits imposed by laws or regulatory bodies. As a result, part of the interests and fees may not be valid or enforceable through the PRC judicial system.
3.The wealth management products displayed on platform involve various risks, and failure to identify or fully appreciate such risks will negatively affect reputation, client relationships, operations and prospects.